JSSAP 23 - Related Party Disclosures
| Part | Item | Paragraph |
| I | 1 - 3 | |
| II | 4 | |
| III | 5 -6 | |
| IV | THE RELATED PARTY ISSUE |
7 - 11 |
| V | 12 - 17 | |
| VI | 18 -21 | |
| VII | EFFECTIVE DATE |
22 |
INTRODUCTION
1. This statement deals with the disclosure of related parties and transactions between reporting enterprises and its related parties. The problems of measurement and accounting treatment pertaining to related party transactions are not dealt with in this statement.
2. The requirements of this statement apply to the financial statements of each reporting enterprise.
3. No disclosure of transactions is required:
(a) in consolidated financial statements in respect of intra-group transactions;
(b) in parent financial statements where they are made available or published with the consolidated financial statements;
(c) in financial statements of a wholly owned subsidiary if its parent is incorporated in the same country and provides consolidated financial statements in that country.
(d) in financial statements of state-controlled enterprises of transactions with other state-controlled enterprises.
4. The following terms are used in this Statement with the meanings specified:
Related party/parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Two or more parties are also considered to be related when they are subject to common control or significant influence.
Related party transaction a transfer of resources or obligations between related parties, regardless of whether a price is charged.
Control ownership: directly, or indirectly through subsidiaries, of more than one half of the voting power of an enterprise, or a substantial interest in voting power and the power to direct, by status or agreement, the financial and operating policies of the management of the enterprise.
Significant influence (for the purpose of this Statement) - participation in the financial and operating policy decisions of an enterprise, but not control of those policies. Significant influence may be exercised in several ways, usually by representation on the hoard of directors but also by, for example, participation in the policy making Process, material inter-company transactions, interchange of managerial personnel or dependence on technical information.
Significant influence may he gained by share ownership. statute or agreement. With share ownership, significant influence is presumed in accordance with the definition contained in Statement of Standard Account in ~ Practice 3.24, Consolidated financial statements.
5. This Statement deals with only those related party relationships described in (a) to (e) below:
(a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise. (This includes holding companies, subsidiaries and fellow subsidiaries);
(b) associated enterprises (see SSAP 3.24, Consolidated financial statements’);
(c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them significant influence over the enterprise and close members of the family* of any such individual;
(d) key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of the reporting enterprise, including directors and officers of such individuals; and
(e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by a person described in (c) or (d) or over which such a person is able to exercise significant influence, this includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise.
In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.
*Close members of the family of an individual are those that may be expected to influence, or be influenced by, that person in their dealings with the enterprise.
6. In the context of the Statement, the following are deemed not to be related parties:
- two companies simply because they have a director in common, notwithstanding paragraphs 5(d) and (e) above, (but it is necessary to consider the possibility, and to assess the likelihood, that the director would be able to affect the policies of both companies in their mutual dealings);
in the course of their normal dealings ( although they may circumscribe the freedom of action of an enterprise or participate in its decision-making process); and
7. Related party relationships are a normal feature of commerce and business. For example, enterprises frequently carry on separate parts of their activities through subsidiaries or associated enterprises and acquire interests in other enterprises - for investment purposes or trading reasons - that are of sufficient proportions that the investing company can control or exercise significant influence on the financial and operating decisions of its investee.
8. A related party relationship could have an effect on the financial position and operating results of the reporting enterprise. Related parties may enter into transactions which unrelated parties would not enter into. Also, transactions between related parties may not be effected at the same amounts as between unrelated parties.
9. The operating results and financial position of an enterprise may he affected by a related party relationship even if related party transactions do not occur. The mere existence of the relationship may be sufficient to affect the transactions of the reporting enterprise with other parties. For example, a subsidiary may terminate relations with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same trade as the former partner. Alternatively’, one party may refrain from acting because of the significant influence of another - for example, a subsidiary may be instructed by its parent not to engage in research and development.
10. Because there is an inherent difficulty for management to determine the effect of influences which do not lead to transactions, disclosure of such effect is not required by this Statement.
11. Sometimes, transactions would have taken place if the relationship had not existed. For example, a company that sold a large proportion of its production to its parent company at cost might have found an alternative customer if the parent company had not purchased the goods.
12. The Companies Act requires financial statements to give disclosures about certain categories of related parties. In particular, attention is focused on transactions with the directors of an enterprise, especially their remuneration and borrowings, because of the fiduciary nature of their relationship with the enterprise.
In addition, SSAP - 3.10, ‘Information to be disclosed in financial statements’, calls for disclosures of significant inter-company transactions and investments in and balances with group and associated companies with directors. SSAP - 3.24, ‘Consolidated financial statements’, requires in such statements list of significant subsidiaries and associated companies, and, for unconsolidated subsidiaries, intra-group balances and the nature of transactions with the remainder of the group. SSAP - 3.3, ‘Extraordinary items and prior year adjustments’, requires disclosure of unusual items.
13. The following are examples of situations where related party transactions may lead to disclosure by a reporting enterprise in the period which they affect:
- purchase or sales of goods (finished or unfinished)
- purchase or sales of property and other assets
- rendering or receiving of services
- agency arrangements
- leasing arrangements
- transfer of research and development
- licence agreements
- finance (including loans and equity contributions in cash or in kind)
- guarantees and eollaterals
- management contacts
14. In order for a reader of financial statements to form a view about the effects of related party relationships on a reporting enterprise, it is appropriate to disclose the related party relationship where control exists, irrespective of whether there have been transactions between the related parties.
15. If there have been transactions between the related parties, it is appropriate to disclose the types of transactions and the elements of transactions necessary for an understanding of the financial statements. These elements would normally include:
(a) an indication of the volume of the transactions, either as an amount or as an appropriate proportion,
(b) amounts or appropriate proportions of outstanding items.
16. Similar items are usually aggregated unless separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the reporting enterprise.
17. Disclosure of transactions between members of a group is unnecessary in consolidated financial statements because consolidated financial statements present information about the parent and subsidiaries as a single reporting enterprise. Transactions with associated enterprises accounted for under the equity method are not eliminated and therefore require separate disclosure as related party transactions.
Statement of Standard Accounting Practice 3.25 - comprises paragraphs 18- 22 of this Statement. The Standard should be read in the context of paragraphs 1-17 of this Statement and of the Preface to the Statements of Standard Accounting Practice 3.1.
18. This Standard applies only to those related party relationships described in paragraph 5, as modified by paragraph 6.
19. Related party relationships where control exists should be disclosed irrespective of whether there have been transactions between the related parties.
20. If there have been transactions between related parties, the reporting enterprise should disclose the nature of the related party relationships as well as the types of transactions and the elements of the transactions necessary for an understanding of the financial statements. This should include the following information:
(a) a description of the nature and extent of the transactions;
(b) a description of the relationship;
(c) amounts due to or from the related parties and, if not otherwise apparent, the terms of settlement.
To convey the extent of related party transactions, it would be appropriate to disclose their recorded dollar amounts, supplemented by information to indicate the proportion of the enterprise’s activities which involves related parties, if not otherwise apparent.
Items of similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the reporting enterprise.
21. An entity may be economically dependent on one or more parties with which it transacts a significant volume of business such as a sole or major customer, supplier, franchisor, franchisee, distributor, general agent, borrower or lender. Such parties are not considered to be related parties by virtue of economic dependence. The volume of business transacted with another party may be so significant, however, that the viability of the reporting entity rests on such economic dependence. In these circumstances the economic dependence on that party should be disclosed and explained.
22. This Statement of Standard Accounting Practice becomes operative for financial statements covering the periods beginning on or after July 31, 1991.